Industrials: Favor ‘Safe Havens’ Like General Electric, RBC Says

By

Ben Levisohn

Dec. 22, 2015 12:02 p.m. ET

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RBC's Deane Dray and team argue that investors in industrial stocks should favor "Safe Havens" like General Electric (GE), Roper Technologies (ROP), Honeywell International (HON), and Danaher (DHR). They explain why:

Bloomberg News

Wrapping up the Multi-Industry sector’s “Fifth Earnings Season”, our overarching takeaway is that relentless oil price declines, foreign exchange headwinds, and weakening China/EM are filling industrial investor stockings with lumps of coal. Every company’s 2016 macro script is calling for the so-called industrial recession to linger. As for 4Q15 dynamics, half of the companies noted incremental organic revenue weakness eating into contingencies Pentair (PNR), requiring additional margin upside to offset lower topline (Danaher, Honeywell International), or driving outright 4Q guidance cuts (3M (MMM), Dover (DOV)). The recent plunge in oil to the mid-$30s has touched off yet another cycle of customer capex cuts and pricing pressure. We see incremental risk to oil-exposed stocks like Underperform-rated Flowserve (FLS) and SPX Flow (FLOW). We appreciate Pentair’s hope-is-not-a-plan, worst-case oil assumptions vs. Dover’s persistently optimistic oil outlook that was subsequently walked down five times in 2015 and again appears too optimistic for 2016. So where can industrial investors hide? We continue to favor our list of Safe Haven names: General Electric, Roper Technologies, Honeywell International, Ametek (AME), Danaher, and Xylem (XYL) – self-help stories with capital allocation/M&A catalysts, margin strength, pockets of end market positives, and low/manageable oil exposures. Of course, valuations look stretched in these Safe Havens, but the investment strategy at the outset of a rate-hike cycle should always be to “inch up the quality curve” and start playing a bit more defensively. We continue to be neutral on the Multi-Industry sector (for two years) and believe the 17x forward P/E – now 1.5 turns above the 10-year average – suggests full sector valuation.

Shares of General Electric are little changed at $30.39, while Roper Technologies has advanced 0.4% to $185.99, Honeywell International has risen 0.5% to $103.11, Dover has gained 1.1% to $59.81, and Danaher has dropped 0.6% to $$91.96.

Industrials: Favor ‘Safe Havens’ Like General Electric, RBC Says

RBC's Deane Dray and team argue that investors in industrial stocks should favor &quot;Safe Havens&quot; like General Electric (GE), Roper Technologies (ROP), Honeywell International (HON), and Danaher (DHR).

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